Archive for the ‘Registered Investment Advisor’ Category

When you sell an investment simply because it has declined in value, it becomes impossible to benefit when it rebounds. The same is true of the broad market in general. Many of these major upside moves can happen quickly, often in just a few days. To avoid missing these key days, you may want to consider staying invested and avoid panic selling. Consider this hypothetical example furnished to us by the folks at Principal Financial Group:

An individual who was invested in the S&P 500 from January 2, 1991, until December 31, 2010 would have turned a $10,000 investment into $58,137.02 for an average annual return of 9.20%, while an investor who panicked and sold their positions during this same period and missed the 10 best trading days in this period would have seen their return fall from 9.20% to 5.47%. [Source: Ned Davis Research]

The lesson is clear: No one can predict when the market will experience its best days.

2. Keep a Long-Term Focus

Studies show that time is your ally. Of the three types of investments studied (stock funds, bond funds, and asset allocation investment options), the average investors in asset allocation funds held their investment options the longest (an average of 4.30 years) over the five time periods studied (1-, 3-, 5-, 10-, and 20-years). It’s little surprise that these investors successfully weathered one of the most severe market declines in history (2000-2002). [Source: Dalbar 2010 QAIB study]

3. Have a Diversification Plan

According to the Dalbar study, investors guess incorrectly about the market’s direction 50% of the time. So, diversification helps guard against those errors; but, many people mistake duplication for diversification by buying multiple mutual funds not knowing many of the underlying holdings are identical.

Choosing different management styles and market capitalizations of equities and bonds isn’t as simple as you’re lead to believe on television. When was the last time you heard a financial entertainer the impact of highly correlated assets? It’s boring stuff and makes for poor television, which is why it isn’t discussed, but it’s what you need to know. Quality diversification enhances the benefits of asset allocation so investment balances are less affected by short-term market swings than they would be if you invested in a single asset class.

If you are an investor who is nearing retirement, consider consulting your advisor about this issue. Remember, asset allocation/diversification does not guarantee a profit or protect against a loss, but it will likely make your journey much smoother.

4. Utilize an Auto-Rebalance Strategy

Historically, business cycle contractions last about one-sixth as long as expansions. Now may be a good time to re-evaluate your risk tolerance. If you want a professionally managed investment option to handle this complicated task, you might want to consider a unified managed account (UMA). It’s an option that simplifies your paperwork, virtually automates the rebalancing process, gives you consolidated reporting while providing the diversification of management, styles, and investments needed to do the job right. UMAs can hold mutual funds, index funds, ETFs, institutional separately managed accounts, and more. A UMA is not an investment; it’s a type of account you use to execute your investment plan. Ask your advisor or – shameless plug – feel free to contact me for information about UMAs.

There are also target-date and target-risk asset allocation funds available on the market; but, tread carefully. Different funds with the same target date or target risk can still have very, very different holdings, styles, and risk profiles. Not everyone retiring in the same year has the same financial picture or ideas about how they want to make the financial journey. As you can tell, I’m not a big fan of ‘cookie-cutter’ solutions.

5. Keep Your Focus

Discipline is something everyone has until panic sets-in. Quite often, that’s when an advisor can show the most value. Successful investing is a marathon, not a sprint. The tortoise did win the race, you know.

6. Get Regular Checkups

Too many individual investors are still stuck in the old paradigm under which their advisor, actually a broker, would call them with investment ideas or changes they should make. Today, with the emergence of the fee-only – that’s different from fee-based – business model utilized by ‘pure’ Registered Investment Advisors (not dually registered to sell securities, too), the new paradigm operates more like other professional practices in law, medicine, or accounting. In short, you need to make an appointment for your checkup, at least annually. And, today, with online meeting technology, you can even do it without getting in your car… so there’s no excuse. Get your checkup! If you don’t, your financial health will likely suffer.

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG also does not provide tax or legal advice. The reader should seek competent counsel to address those issues. Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan. The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, Keep up to date with IFG on Twitter: @JimLorenzen

The average investor can often have a difficult time understanding just how different investment professionals operate and who they’re really dealing with.

There are three basic service model environments where investment professionals can be found; but, what can make these environments even more difficult to understand is that it’s possible for two to be combined… or one can be masqueraded to look like something else entirely! When you add to all that the alphabet soup of credentials and designations – some excellent and most meaningless – it’s no wonder the average investor has trouble figuring it all out.

While it would be impossible to address everything without writing a book, here’s an admittedly cursory overview of the three environments. All have their selling points and negatives – and none is intrinsically better than the other – but, since I’ve worked in all three, maybe I can help shed a little light on this and make them a little easier to understand.

1. The Captive Registered Representative

This is how many, including yours truly, began their careers; and, in fact, many never leave! The captive RR is someone you may know as a stockbroker, although the broker-dealer is actually the employer firm and the person you’re thinking of is a Registered Representative of the broker-dealer firm. These firms can be the well-known large ‘wire houses’ with widely-recognized names or they can be smaller regional or even local firms. In all captives, the RR is an employee of the firm and it is the firm that must sign ‘selling agreements’ with outside product providers if the RRs are going to offer anything other than in-house product.

I began my career in such a firm that provided all the services and infrastructure. The job of an RR was is to generate revenue for the firm. The hierarchy looked something like this:

What you may not know: In the old days, these large firms made most of their money from their own packaged in-house proprietary product, including mutual funds, unit investment trusts (UITs), and other offerings. I don’t know how true that is today – my guess is it’s probably much less so than in those days. The reason I think this is because the wirehouse industry’s margins have been declining steadily over the years, indicating fewer proprietary product sales and evidenced by (1) a greater number of mergers that never seem to end, and (2) the fact that broker payouts – the percentage they pay their RRs on generated revenues – have been declining. Brokers throughout the industry are having a tougher time ‘keeping their desks’ as margins have put pressure on RRs to increase revenue production. This may be a reason why some, if not all, within that community are resisting the adoption of a fiduciary standard.

As I said, some RRs never leave the large wirehouses, for a variety of reasons, including the large in-house back-office infrastructure support, etc. And, let’s face it, some may not be cut-out for self-employment. For those who are, they often take the next step.

2. The Independent Registered Representative

Some RRs who don’t want to remain ‘captive’ often want to set-out on their own and open up a private practice. When a RR makes the decision to ‘break free’, they have to pay their own bills. In my early days, that meant getting office space, phones connected, office furniture, supplies, and paying for my own insurance and a thousand and one other things; but, I could now select my own broker-dealer (BD) to function as my back-office and process all the paperwork through the various providers, etc.

There are hundreds of BDs available to the independent RRs and they come in all shapes and sizes with different attributes. Since my need was primarily for back-office processing, I wanted one that had (1) prompt and quality personal service, and (2) good relationships with quality custodians and other service providers. Today, almost all can probably fit that bill. While the RR is not an employee of the BD, the BD must still have Selling Agreements with product providers before the RR can access them for his/her clients.

One of the things about independence that independent RRs like is that the hierarchy can be flipped, which, to my mind, creates more of a ‘client first’ environment.

What you may not know: An independent RR may be operating out of a small office in your local community; but, don’t let that fool you. That independent likely has access to a huge array of institutional money managers and widely respected and recognized asset custodians and other service providers. In fact, it wouldn’t be at all surprising if your local RR office actually had a wider menu of availabilities than the major wirehouse down the street, since many BD operations have provided their RRs with greater access to the marketplace. An independent is far more likely able to provide you with a choice of custodians, etc., than a captive whose employer itself may want to be the custodian.

Something else you may not know: Ever walk into your local bank branch and see the investment desk sitting somewhere in the lobby or off to the side? When you sit down at that desk, you may think you’re still in the bank; but, guess again. There’s no FDIC insurance there! The likely scenario: Some BD has signed a deal with the bank to private-label a brokerage service. Not bad; you should simply be aware.

Some independent RRs finally decide to complete the process: They want to drop all sales and commissions and gain access to the entire world of products and service providers, including those who don’t work through sales channels. In my case, since I had already been in business in my own office for fifteen years, it was a simple process to register as an advisor and simply drop all the selling licenses. An RIA must avoid conflicts of interest and operate under a fiduciary standard: The clients’ interests must be paramount.

The model, however, looks much like the independent RR:

What you may not know: Captive RRs and independent RRs both very likely work for or with a BD that is dually-registered, making the RRs also RIA representatives. This allows them to work on a fee basis, as well as on commission. Some will tout their fiduciary status during the planning stage; but, you should ask if they will operate under that status during the investment implementation stage. It’s one thing to “adopt a fiduciary standard’ and quite enough to accept fiduciary status in writing. From what I’ve observed, few, if any, BDs will allow their RRs to accept this status, whether they’re captive or independent. That doesn’t mean they aren’t honest or that they don’t do good work; it’s just something you should be aware of.

Also be aware that some RIA firms provide investment management, asset custody, and portfolio reporting services all in-house while others prefer to work in a purely advisory capacity using third-party providers for the various services.

Example: In my own practice, most clients’ assets receive custody services from Pershing (owned by Bank of New York-Mellon). All institutional managers are independent of the custodian and all portfolio reporting is provided by third-party services independent of the managers. All parties are compensated by client fees only, as are my advisory services. While it may sound like more fees, it’s often actually less. All these services are usually ‘bundled’ by investment providers; I just unbundle them and ‘shop’ them individually, which can result in savings.

While this overview just scratches the service, it might give you some idea of the playing field. In the final analysis, choosing an advisor is a personal choice. You should find someone you’re comfortable with… and someone who will talk with you like an adult. Avoid the ‘glad handers’ who tell you what you want to hear; find one that will talk straight and tell you what you need to hear, even if you think you’re an investment genius.

Good luck!

Jim Lorenzen, CFP®, AIF®

—————————

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

According to a Morningstar study I saw that was conducted in 2010, the odds for those trying to `time the market’ didn’t look too good – and I doubt they’ve improved much – but there are still a lot of financial tv shows picking stocks for all of us. Are they doing us a favor?

Anyway, the study I saw analyzed the cost of market timing using the S&P Index over the 10-year period of 1990-2009 inclusive, which comprised 5,044 trading days.

An investor who stayed invested during the entire period would have experienced an average annual return of 8.2%. Hmmm, didn’t that include the period of the 2008 market meltdown? But, I digress. Here’s what the study found:

· Missing only the 10 best days reduced that percentage to 4.5% – almost in half!

· Missing only the 20 best days meant realizing only a 2.1% average annual return for the entire ten-year period! Returns were cut in half again… and 75% less than the investor who stayed invested!

· Missing the 30 best days meant an average annual return of only 0.1% – for the entire 10-year period!!! It’s worth noting that those 30 best days may not—and probably didn’t—run consecutively, which makes it even more problematic. Can YOU guess those 30 days—in advance?

· Missing the 40 best days meant a return of –1.8% as an average annual return for the entire 10-year period; and missing the 50 best days took that percentage down to –3.5%

Other studies I’ve seen show that individual investors do underperform indexes by a wide margin! The reason seems to be because they react to current events. One CFO I talked with told me he constantly sees people ‘get out’ after drops only to be left there during rebounds!

Why do they do this? Maybe because they simply don’t have an investment discipline. It becomes too easy to react to headlines. The next time someone tells you they manage their own portfolio, ask them, “If you had a choice of ten managers – nine professional institutional money managers and yourself, would you pick you? Would anyone else?”

Here’s a sample set of screening questions you can use. Ask your potential advisor to answer them in writing before you begin your discussions. For example:

Are you a registered investment advisor, a registered representative, or both?

Note: A registered investment advisor (RIA) works for fees. A registered representative works on commission. Some `advisors’ are `dually’ registered. A registered representative (broker) is free to operate under a `suitability’ standard while an RIA is legally required to work under a `fiduciary’ standard, which means the client’s best interest must be paramount. `Dually-registered’ representatives will often adopt the fiduciary standard for the planning process, then adopt the `suitability’ standard when it comes time to select investments. Under that standard, an investment may not be in the client’s best interest; but, if it’s suitable, it passes.

Do you work for fees only, commissions only, or a combination?

Note: If a combination, you want a breakdown on each. When does the `fiduciary hat’ come off and the ‘suitability hat’ (commissions) go on? Some adopt fiduciary status for planning but switch to the ‘suitability’ standard when it comes to the investment process.

Do you accept fiduciary status and are you willing to put it in writing?

Note: If your candidate isn’t willing to accept fiduciary status in writing – for both planning and investments – one has to wonder just what you’re paying them for. Chances are it might be simply product sales.

Who provides the reporting on my account?

Is it his own firm? That’s not necessarily bad, but it’s worth knowing.

What firm will serve as custodian of my assets?

His own firm again? Again, not necessarily bad, but again worth knowing. If it’s one thing all the `bad guys’ have in common, it seems to be the lack of an independent custodian. If a firm has custody of your assets, does the managing internally, and also provides the reporting, where are your checks and balances? Where is your independent verification? All those so-called sophisticated investors who lost money to Bernie Madoff and every other crook could have asked this simple question.

Are the managers you recommend in-house managers or outside managers?

His own firm again? Hmmm. Be careful. Sometimes a ‘proprietary’ solution won’t transfer so easily if you decide to move to another advisor. When was the last time an `in-house’ manager was fired in order to use an outside manager? Thankfully, this isn’t as much of an issue today as it used to be – I don’t think; I’ve been away from that environment for some time now.

Spotting a good advisor shouldn’t be too hard: A good one will focus on you and not the markets. S/he will talk about process and risk management and take time to learn about your issues and concerns.

A bad advisor – or worse, a rogue – will focus on investments, returns, and markets. And, s/he’ll love if you should ask, “What kind of return do you get for your clients?” That’s a question Bernie Madoff loved to hear. Only novices and `marks’ would ask it.

Smart investors take a high-level view of portfolio makeup, knowing an 80-year old retiree has a financial and risk profile completely different from a 45-year-old high-earner who’s trying to accumulate assets for the future.

Remember, success isn’t about being brilliant; it’s about being smart – and the definition of smart is not being dumb.

Jim

————————————–

Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

If you are someone who makes decisions regarding your company’s retirement plan, this could be quite important for you to know.

I entered the advisory business in 1990, coming from the world of management consulting; so, I was used to a business model where the consultant works for the client and is paid on a pure fee basis. The way you kept clients was by bringing value to the client beyond the size of the fee charged and by avoiding interest conflicts – a standard beyond merely ‘disclosing’ them.

What I wasn’t used to was the marketing hype used to sell the products and services in the advisory industry, as opposed to the management consulting industry. Let’s face it: The advisory industry certainly has its share, always built around whatever is currently happening in the marketplace.

These days, especially with new disclosure rules coming down the pike, plan sponsor fiduciaries are rightly concerned with minimizing liability exposure and, of course, there are advisors now jumping out of the bushes telling plan sponsors how they can virtually eliminate their liability for investment management. All they have to do is hire a 3(38) investment manager instead of a 3(21) advisor. By the way, an advisor can be either a 3(38) or a 3(21), it’s simply a matter of taking discretion and meeting a few other requirements; so, why wouldn’t all advisors get on the band wagon?

The fact is, many are jumping on board; but, like all marketing fads, this one may prove to be little more than a smoke screen, after all.

Now, I’m not an attorney, let alone an ERISA specialist; but, I did study enough law to know that the doctrine of constructive knowledge doesn’t refer to the building of an overpass, and it helps that I can get ERISA attorneys on the phone.

With those limitations in mind, here is my own humble take on the 3(38) vs. 3(21) discussion.

First, the 3(21): ANY individual is a fiduciary under Section 3(21) if he or she exercises any authority or control over the management of the plan or the management or disposition of its assets; if he or renders investment advice for a fee (or has any authority or responsibility to do so); or if he or she has any discretionary responsibility in the administration of the retirement plan, not to be confused with the ministerial duties of a third party administrator.

The point: It’s a functional test; it’s not about titles. If YOU make any decisions regarding your plan, YOU are functioning as a 3(21) fiduciary. If you think it’s a good idea to get professional help, you can hire a 3(21) consulting professional to become a co-fiduciary to help you perform your duties. The ERISA regulations even appear to encourage this and will allow you to pay the consulting professional from plan assets, something many company plan sponsors appreciate. Included among a fiduciary’s responsibilities is the prudent screening, selection, and monitoring of plan investments (and managers), including establishing and following a documented prudent process for the selection, review, and possible replacement of the investments or managers. This includes documenting a decision not to replace investments or managers; and, by the way, doing nothing is a decision that should be documented. So much for our cursory description of a 3(21).

What’s a 3(38) manager? ERISA section 3(38) defines “investment manager” as a fiduciary due to their responsibility to manage the plan’s assets. ERISA provides that a plan sponsor can delegate the responsibility (and thus, likely the liability) of selecting, monitoring and replacing investments to a 3(38) investment manager/fiduciary. A 3(38) fiduciary may only be a bank, an insurance company, or a registered investment adviser (RIA) subject to the Investment Advisers Act of 1940.

So, is the plan sponsor ‘off the hook’? You need only review the plan fiduciary’s responsibilities: The plan sponsor is acting – remember, it’s a functional test – as a 3(21) when they make ANY decision regarding the plan. Selecting a 3(38) manager is a 3(21) function, don’t you think? Monitoring and possibly replacing the 3(38), including documenting your actions or inactions, is also a 3(21) function! If that makes sense to you – and it should – then it will be easy to follow this logic:

The 3(21) plan fiduciaries are relieved of investment related management decisions of the 3(38), provided the 3(21) fulfills his/her fiduciary responsibilities, a few of which I outlined earlier.

Failure to fulfill fiduciary responsibilities by a 3(21) could likely result in a loss of those protections afforded by the 3(38).

You can’t escape it: You still have the obligation to perform your 3(21) responsibilities, or hire a professional to help, which can make the process a lot easier and likely more thorough. You still need a 3(21) to provide oversight of the 3(38).

The 3(38) manager can relieve you of investment related liability (see #1 and 2), but is now actually functioning as another service provider. To conclude that the 3(38) manager’s reporting fulfills your oversight requirement might be somewhat naïve. Whoever heard of fulfilling a fiduciary obligation to monitor a service provider by allowing them to monitor themselves? (Note: Just as many advisors are now jumping on the 3(38) bandwagon and promoting the `elimination’ of fiduciary liability, those same advisors are marketing their services to 3(21) advisors in hopes of getting plan takeovers… “We can remove liability, etc.”).

The Bottom-Line:

Plan sponsors are still responsible for the selection, monitoring, and possibly replacing the 3(38) advisor who, after all, may be held to be little more than a vendor selling an investment service but responsible for their own actions. Failure to follow a prudent process in doing this just might result in a loss of the protections. To me, that logic is pretty clear to see. The short takeaway: You’ll probably still need a 3(21) on your side of the table to conduct due-diligence on the 3(38) manager, who should be regarded as another service provider, albeit with increased responsibilities.

Be safe: Talk to your ERISA attorney.

Jim

————————–

Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Just as many brokers (registered representatives of broker-dealers) have been moving from their brokerage houses to become independent registered investment advisors over recent years, it appears many individual investors seeking advice are learning who these people are and are following them.

According to TD Ameritrade’s latest RIA survey, trust and customer service are the most important reasons why clients opt to work with registered investment advisors (RIAs) instead of commissioned brokers.

TD Ameritrade’s quarterly query of 502 RIAs, appearing in this month’s issue of Financial Planning, found that 29% of clients using RIAs said that the RIA’s fiduciary responsibility to work in the best interest of clients was the No. 1 reason they got their business. Placing second at 21% was more personalized service and a competitive fee structure, just ahead of dissatisfaction with their current or former full commission broker (19%).

Tom Bradley, president of TD Ameritrade Institutional, said in the report, “The survey results support what we believe is a long term trend of investors gravitating to the fiduciary model… Investors may increasingly seek the confidence that can come from working with independent RIAs who sit on the same side of the table and are required by law to put their clients’ interests first.”

According to the survey, 55% of new business coming to RIAs are coming from traditional full-commission firms. Not much of a surprise, since that’s where most RIAs came from themselves, including yours truly.

It appears the trend is due to the fact that responsible practitioners want the same thing their seem to desire: A high level of professionalism characterized by a `client-first’ fiduciary standard coupled with a non-conflicted environment.

Frankly, it was the reason I began my journey to independence back in 1992; and, it’s gratifying to see that individual investors are finally catching on.

You’ve heard that a thousand times. We all have. And, it doesn’t matter which decade you’re in. The 1970s, 80s, 90s, and the last ten years have all been periods of uncertainty. Whether the questions were about inflation, interest rates, tax laws, or increased market volatility, there’s been one constant:

Markets never have been, and never will be, certain of anything. I remember people back in 1991 wanting to wait until they would `know what the market was going to do’. They’re still waiting, I think.

Name a time you’ve ever heard anyone say, “Well, at last we have certainty in the markets!” I’ve never seen it; and I don’t know anyone who has, either.

Warren Buffett, someone everyone loves to quote, is famous for saying he never met anyone who could predict the stock market. He knows more people than I do. All I know is when I begin getting market advice from my dry cleaner, it does send me a message; but I digress.

Right now, everyone’s worried about congress and whether they’ll raise the debt ceiling[1]. The Democrats are doing their best to scare everyone regarding the consequences of failure, claiming the U.S. will default. The Republicans are claiming our biggest problem is the spending and borrowing more won’t help – I guess we all remember our younger days using our first credit card, so we can relate to that.

History has been filled with uncertainty and unpredictability:

Pearl Harbor

The Korean War

The Cuban Missile Crisis

The Vietnam War

The rise of the Japanese manufacturing

Mid-East Oil Crisis

Skyrocketing inflation and interest rates

Plunging interest rates

The Iranian Hostage Crisis

President Reagan walking out of the peace talks with Soviet Premier Gorbachev

The fall of the Soviet Union

That’s enough; I’m sure you can add many more to the list, including the first Iraq war, etc.

Uncertainty is not new. It’s normal.

Predicting the future worse than futile – it borders on the idiotic

And so, it should go without saying that reacting to events is not smart. It’s counter-productive.

Don’t fall for the line, “This time it’s different.” It isnt’.

The answer isn’t simplistic; but, it is simple: Those who succeed are generally those with a plan.

Your plan is like a lighthouse in a storm: No one pays much attention during fair weather; but, when the skies turn dark and storms are raging and your boat is being tossed around – when it’s hard to see through the dense fog – the lighthouse shows you the way.

It’s the one thing that isn’t moving. It’s what you depend on to get you through the uncertainty. It’s tangible.

Your plan should be tangible, too. If your financial plan is `in your head’, face it: You don’t have one. It must be tangible. It must be something you and your spouse can both see, touch, feel, and refer to when the uncertainty is all around you.

And, it always is.

Jim

—————————–

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any secrity or the services of any person or organization

[1] Just for the record, most are confusing two issues. There is a difference between meeting debt obligations – bond payments to Treasury investors – and funding spending programs. Failing to raise the debt ceiling will not result in debt default simply because Treasury revenue from current taxes is sufficient to meet those current obligations. The real issue is not credit default, but the funding of the spending programs. Without increase ability to borrow more, the government will be forced to prioritize their spending, which means cutting back on some programs which help get some politicians re-elected. Naturally, if forced to prioritize, especially during an election season, many politicians will love to see programs cut for the largest voting constituency first – pain generates letters to representatives to change their vote.

So, you received your pension statement stating that you can expect $50,000 a year for life when you retire in twenty years. Is that good?

It depends. You knew I was going to say that, didn’t you?

Count yourself as lucky. Not too many people even have pension plans anymore. But, will that pension be enough to meet your needs?

Of course, you may continue to get raises which could raise your pension amount; maybe you’ll even get $75,000 a year! But, what will that money actually buy?

That depends on your outlook for inflation, of course, and my outlook may be different from yours. My chief economist, who does the shopping for our family, tells me a different story from what I’m hearing from Washington. Food and energy, which are not counted in the government’s figures, are two things we spend a lot on – and they’ve been going up dramatically! Housing prices are down, true, but we’re in our house and not moving – meanwhile, the cost to heat and cool the house has also increased.

My personal CPI (cost of living index), which I’ll call my PCPI, is different from the CPI I hear about on tv. While some advisors are now using 3.5% in their projections, I think the number going forward will be closer to 4.5% – especially as, I suspect, the government will print money to reduce debt even as the economy, sooner or later, begins to actually find its way to a real recovery.

But, even if you achieve a $75,000 pension – and even if inflation is only 3.5% – just what will your money buy 20 years from now? According to my trusty HP10BII, your pension will be worth $37,692 in today’s purchasing power. You’ll probably receive Social Security, too; but both will be subject to income taxation, and what those rates will be in 20 years is anyone’s guess – I know I have mine. Could you live in retirement today on $37,692 + Social Security before taxes? What will your car cost? How often will you need one?

Inflation doesn’t end when you retire! Every pension I know of, except from the government, doesn’t include cost of living adjustments (COLA). In another ten years, your pension will be worth only $26,721; and only $18,943 ten years after that! That’s right: You’re losing purchasing power to inflation every year… and by your third decade of retirement, you might even be a pauper! And, that’s using the $75,000, 3.5% inflation scenario!

Planning ahead is important. The cliché’ is true: If you fail to plan, you are planning to fail. The sooner you know your situation, the sooner you can not only create a plan – you can actually ACT to change your future.

Jim

—————————–

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.